Wal-Mart is Slowing Down
Wal-Mart is looking to slow down the rate of its capital expenditures and that means it will build fewer new stores in the coming years.
The company’s CFO Tom Schoewe said capital spending in fiscal 2008 will likely come in under four percent. That compares to the 15 to 20 percent increase in capital spending Wal-Mart projected for this year.
“In the past three years, capital expenditure growth has been higher than square footage and sales growth,” said Mr. Schoewe in a company press release. “During our next fiscal year, we expect that square footage growth will be around 7.5 percent. International square footage is expected to increase approximately 10 percent and U.S. square footage is expected to increase approximately 7 percent.”
Even with it slowing down, Wal-Mart expects to open up to 660 new stores here and in foreign markets.
John Menzer, vice chairman of Wal-Mart, said, “We are still very committed to growth, but our real estate projects are now being subjected to a more rigorous prioritization process,” Wal-Mart Vice Chairman John Menzer said. “This store selection process will enable the company to drive higher returns by focusing on locations that make the most efficient use of capital.”
“Supercenters will continue to be our primary driver for expansion in the United States,” Mr. Schoewe said. “Internationally, our unit growth will cover a wide variety of formats, from large units like Wal-Mart supercenters and Sam’s Clubs, to smaller retail locations like Despensa Familiar in Wal-Mart Central America, Bodega Aurrera in Mexico, and Bompreço in Brazil.”
The company said it plans to open up to 270 new Supercenters, 10 discount stores, 20 Neighborhood Markets and 30 Sam’s Clubs.
Discussion Question: What do you make of Wal-Mart’s announcement that it would slow capital expenditures and open fewer new stores during the next fiscal
year?
I think you can conclude that many of the good locations are gone and that, in some markets, they have enough stores. Maybe Wal-Mart is smart enough to realize that growth for growth sake isn’t really a strategy.
Increasing your spending by 4% is not exactly a “slowdown.” In the current fiscal year they plan to spend about $17 billion, so add 4% to that to get the $ spent in 2007. It’s a huge number, representing close to 5% of its total sales. Actual store count added is about the same as last year, with international growth a focus. By the way, this doesn’t include acquisitions (used often in the international markets but almost never in domestic).
Events and conditions are conspiring against WM’s growth. Labor, suppliers, resistant communities, regulation of the Chinese monetary system, and competition are taking their toll. To position slow growth as a business decision is inspired, but disingenuous.
Probably prudent for Wal-Mart, but more because of rapidly changing age/income demographics through 2020 than because of cannibalization concerns.
This is great news for Wal-Mart and its shareholders. Wal-Mart needs to focus on becoming better at what it does, not necessarily doing more of what it does. At the end of the day there is much for Wal-Mart to become better at, and this includes focusing on operational excellence in addition to providing a clearer retail picture for its customers. Even at 4% growth, with its largess, Wal-Mart will have a tremendous impact on both its new store openings, as well as renovating and updating its existing store base. More is not better when it comes to retail!
I welcome the news because it might allow Wal-Mart’s dizzying array of brand launches, product upgrades and stores of the community to fully take hold with consumers in existing stores. As it stands now, stores within a few miles of one another are so finely tuned to the local market as to feature unique items and completely unique brand presentations in key areas. This is intentional of course; however, I believe it makes it difficult for consumers to identify with the “new Wal-Mart” and wrap heads around the changes.
The stores here in Northwest Arkansas (prototype-ville AND vendor-ville!) provide extreme examples, of course; however, as Wal-Mart loads stores into other key geographic areas (such as D/FW), we’re finding that the dynamic repeats. As a consultant and shopper, if I want to see the latest in CE, I head up the road to Missouri (lower sales tax = stellar CE dept.). Check in on that limited-store home decor test? Rogers Pleasant Crossing (only). That hot urban line in young men’s? Trek to Fayetteville (only). Launch of that great new organics program in HBA? Bentonville (only).
It is fascinating to see just how different the selections can be between Wal-Marts these days, which creates a new kind of “cross shopping”…shopping between “area” Wal-Marts, not necessarily departments within a given store!
Wal-Mart should reduce its location growth even further. Growth for its own sake isn’t smart. It’s best to allocate capital only to the highest payback projects Wal-Mart can find. Opening stores in high-cost areas, domestic or foreign, is sowing the seeds of weakness. Retailing is a risky business, so retail investors deserve only the highest potential returns on investment. It’s not important to be #1 in sales growth or location growth. Return on investment should be the priority. Sam Walton’s driving forces: low cost real estate and low cost operations. Urban expansion can lead to higher real estate costs and higher operating costs (union or not, living wage or not).
Although Wal-Mart is slowing the percentage of investment in this area, we need to keep in mind that, based on the total dollars, we are still talking about a high level of investment. To the bigger point that taking some of the attention away from fast paced growth to managing the existing base and fully develop their ongoing strategies like George, Upscale assortments and most of all, customer service, can only be a plus for them in the long run.
This seems to be an appropriate decision. Same store sales growth has been in the low single digits. Wal-Mart is concentrating marketing spend on increasing the revenue generated by footsteps already in the store, albeit not purchasing in every department.
Becoming over-stored is something Wal-Mart cannot afford to do. There is no competitor out there gobbling up real estate and forcing site selections which do not meet initial investment hurdles (see the McDonald’s example in the 90s).
Organizations cannot multi-task, at least not at the level of powerful strategic growth direction. The creative energy of US Wal-Mart executives needs to be focused on sustaining, enhancing and completing the repositioning currently underway. Generating comp store increases is going to continue to require the development and improvement of core competencies around flexible assortments, brand development and the intelligent use of CRM-type data to create subtle differences in the Wal-Mart experience across consumer segments.
Continuous physical expansion places strains on resources. The very best models out there have periods of expansion followed by periods of consolidation. As an easy example, major league baseball underwent rapid expansion. The talent pool thinned. The quality of the product dropped off. Consolidation occurred. The talent pool enriched. The quality of the product has rebounded.
Coherent decision making at the corporate level. Wow.
This is like General Patton saying he is slowing down his push to Berlin. I think Wal-Mart just wants us to think they are slowing. Wal-Mart is well known for downplaying their successes. This makes their critics think they are winning and as long as they think they are winning, then perhaps they will back off.
I agree with the comment above that Wal-Mart needs to redeploy a lot of its capital spending on its remodel initiative, to help the stores keep pace with changes in merchandise content. Even lowering the number to 4% growth (more in line with their overall performance lately) provides a huge number to retrofit hundreds of stores that need a facelift. It also allows Wal-Mart to be more tactical, short-term, about new buildings until the results of all the repositioning pay off in higher comp sales.
What markets are still left for Wal-Mart to build new stores?
When filling a glass, i.e., trying to continually increase SOM with new store openings everywhere, there comes a time when the contents of that glass finally reach the brim. Then you work diligently to keep the water therein (existing stores) more productive as well as keeping Wall Street happy. That would appear to be the strategy of the Aristotles in Bentonville.
Can any one answer these questions?
In your opinion what is Wal-Mart’s approach to executing its strategy? What recommendations can you make for improvement?
What actions do you believe they should take to address the issues and challenges facing the company?